House of AlphaMetrix falls hard and fast

November 24, 2013 06:00 PM

Inc. 500, 2010. Crain’s Fast Fifty, 2011. Crain’s Fast Fifty, 2012. AlphaMetrix Group LLC, Chicago, appeared to be a company going places fast. That is, until 2013, when the self-described “Marketplace for Private Investments” found itself on the very top of lists belonging to the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). 

AlphaMetrix, which boasted a five-year growth rate of 8,030.4% in Crain’s Chicago Business 2011 Fast Fifty issue, now faces CFTC charges alleging that the firm committed fraud and misappropriated at least $2.8 million that belonged to pool participants.

Just the facts

In the “beginnings” section of its website, AlphaMetrix positions itself as “building a foundation of certainty and trust.” On Oct. 10, 2013, AlphaMetrix founder and CEO Aleks Kins issued a letter to pool participants that would seem to indicate that there are a few cracks in that foundation, perhaps even enough to bring down the house that Kins built. Kins’ letter, in part, reads:

“We write to update you on certain developments at AlphaMetrix Group LLC (‘AlphaMetrix’), the ultimate parent of the AlphaMetrix family of companies. In the operation of our business, we regularly run intercompany balances between and amongst our affiliates. Our regulated commodity pool operator, AlphaMetrix LLC (the ‘CPO’) is one such affiliate with whom there are intercompany balances. The CPO’s assets consist largely of a receivable owed to it by Parent. Parent has recently encountered significant cash flow issues and is working to strengthen its current financial position and its continued operations. As a result of this, the CPO has delayed fee rebates owed to certain of its third-party money managers and participants, which should have been reinvested into various pools, but were not. The fact that these fee rebates were not reinvested may have an impact on the pools’ net asset values.

“Additionally, the CPO has not paid management and incentive fees that were earned and owed to third-party money managers, yet it has withdrawn those fees for payment from various pools.”

In addition, the letter stated that CFO George Brown had been dismissed and the services of Arthur Bell, CPA, had been retained to “review and assist us in improving our internal controls and recordkeeping procedures.”

The departures of two other senior staffers, Mikus Kins, chief product and business development officer, and Geoff Marcus, chief strategic officer, followed shortly thereafter. At its peak, AlphaMetrix claimed more than 120 employees, with headquarters in Chicago, and offices in New York, Columbus, OH, London and the Cayman Islands. How many of those employees remain is unclear. 

On Oct. 21 the NFA issued a Member Responsibility Action (MRA) against the firm. The MRA was issued to curtail AlphaMetrix’ problems and keep them from expanding. The order required AlphaMetrix LLC “to satisfy its obligations to certain pool participants by Nov. 1,” which means that the NFA can suspend the member, restrict its operations or direct it to take “other remedial action.”

The NFA issued a statement that said, “The firm had deducted advisory fees for certain participants in commodity pools operated by the firm. Those fees were to be reinvested in the pools but were not. The total amount owed to participants is approximately $600,000. AlphaMetrix has approximately $700 million under management. According to NFA’s action, if AlphaMetrix fails to satisfy its obligations by Nov. 1, the firm would be prohibited from placing trades for any of its pools except for trades liquidating open positions. Further, any disbursement of pool funds could only be made with NFA’s approval.”

On Oct. 31, AlphaMetrix announced in a statement that it would cease trading operations as of that date and enter that portion of its business into an orderly liquidation.

The statement read: “In light of recent redemption requests, AlphaMetrix has determined that its sponsored funds will no longer be able to effectively trade the investment strategy employed by each trading advisor. As a result, AlphaMetrix has decided that it is in the best interest of all investors for the funds to cease trading as of Oct. 31, 2013, and enter into an orderly liquidation. For all investors who have not already redeemed, it is anticipated that AlphaMetrix will distribute 90% of the proceeds to investors on or about Nov. 21, 2013. The balance will be completed upon the completion of a final audit.”

The CFTC was the next regulator to charge AlphaMetrix. On Nov. 4, the CFTC filed charges in the U.S. District Court for the Northern District of Illinois Eastern Division, alleging that AlphaMetrix violated the Commodity Exchange Act.

The CFTC’s complaint alleges:

  • Between at least Jan. 1 and Oct. 31, 2013, defendant AlphaMetrix LLC (“AlphaMetrix”), a registered commodity pool operator (“CPO”) and commodity trading advisor (“CTA”), misappropriated at least $2.8 million in funds belonging to participants of numerous pools operated by AlphaMetrix and issued false or misleading account statements to these pool participants that concealed its fraud.
  • Specifically, AlphaMetrix agreed to pay rebates of fees to certain participants in commodity pools it operated by reinvesting the rebates in the commodity pools in the name, and on behalf, of the participants. Between approximately Jan. 1 and Oct. 31, 2013, AlphaMetrix was obligated to reinvest at least $2.8 million worth of rebates back into commodity pools in this manner. However, AlphaMetrix failed to reinvest these funds and instead transferred them to bank accounts of its parent company, AlphaMetrix Group LLC (“AMG”). As a result of this unlawful conduct, AMG received AlphaMetrix pool participants’ funds to which it had no legitimate interest or entitlement.
  • Account statements that AlphaMetrix emailed to these pool participants during this time period reflected increases in the participants’ net asset values, as if the rebates had been reinvested in these pools, even though they were not.
  • In October 2013, AMG and Aleks A. Kins (“Kins”), the President and Chief Executive Officer of AMG and AlphaMetrix, admitted in a letter to participants describing ‘significant cash flow issues’ that AMG was encountering that AlphaMetrix did not actually reinvest funds owed pursuant to rebate agreements, which ‘may have an impact on the pools’ net asset values.’”

The complaint further alleges that the conduct described violates the core anti-fraud provisions of the Commodity Exchange Act (CEA). On Nov. 5, the Federal Court in Chicago entered a Consent Statutory Restraining Order that was requested by the CFTC. 

In a statement, AlphaMetrix agreed to the entry of the Order as it is consistent with the firm’s efforts to liquidate and return funds. According to the statement, AlphaMetrix denies the CFTC’s allegations that it violated the CEA.

“The Order appointed a Corporate Monitor for all commodity pools operated by AlphaMetrix,” according to the firm’s Nov. 6 statement. “The corporate monitor is directed and authorized to ensure that at least 95% of pool participant funds are returned to participants no later than fifteen (15) days from the entry of the Order. AlphaMetrix will cooperate with the Corporate Monitor.

“It is anticipated that additional pool participant funds will be released once tax, audit and other such service fees are estimated and accrued for as directed by the funds offering memorandum. AlphaMetrix is currently communicating with Deloitte to engage them to complete final audits. Deloitte has audited funds for AlphaMetrix since 2008.” 

As a privately held company founded in 2005, little is available about the financials of the firm, but the June 6, 2011 edition of Crain’s Fast Fifty shows 2010 revenues of $41.7 million, 87 employees, profitability and a five-year growth rate of 8,030.4%. The 2011 edition of Crain’s Fast Fifty, released June 4, 2012, shows 2011 revenues of $51.2 million, 102 employees, no profitability and a five-year growth rate of 2,831%.

The firm’s offerings are AlphaMetrix technology (the managed account platform), investment research, investment products, financial investigations and its [known to be extremely lavish] events. 

The firm’s platform was supposed to give investors access to fully vetted funds and, according to the website, “achieve a higher level of verified trust.” Touting its high levels of due diligence the firm hired former Secret Service members and formed AlphaMetrix Financial Investigations, which performed comprehensive background investigations on traders and advisers wishing to join the platform.

While the firm’s initial roots were in technology and “secure” investing, it was the events that captured people’s attention and drew the crowds.

Talk of the town

Alphametrix’s first event was education, speed-dating and golf for charity at the Beverly Hills Country Club on the south side of Chicago. This was followed by the firm’s first summit in 2010 at the Doral in Miami, with educational speakers and speed-dating for managers and investors. Harry Markopolos, best noted for his attempts to get the U.S. Securities and Exchange Commission to investigate Bernie Madoff, was the keynote speaker, discussing the red flags surrounding the Madoff fraud. 

Subsequent conferences dropped the educational seminars and focused on speed-dating and high-profile speakers such as Tony Blair. Weekend networking events were sponsored by AlphaMetrix including water sports at the Monte Carlo Beach Club; “Crepes and Croquet” at the former home of Karl Lagerfeld; and spouse packages that included South Beach (Miami) walking tours, spa treatments and champagne cabanas.

A manager who preferred anonymity noted that while he had attended their conferences because there were “real” investors there, he didn’t understand the math. “It wasn’t clear to me how they made money with the platform. The numbers didn’t seem to work.”

At least according to the regulators, his arithmetic is right. 

About the Author

Michael McFarlin joined Futures in 2010 after graduating summa cum laude from Trinity International University, where he majored in English/Communication. With the launch of the new web platform, Michael serves as web editor for the site and will continue to work on the magazine, where he focuses on the Markets and Trading 101 features. He also served as a member of the Wisconsin National Guard from 2007 to 2010.

In her many years covering the futures industry Ginger has interviewed some of today's best global hedge fund and commodity trading advisors. Ginger received a master's degree in journalism at Northwestern University's Medill School of Journalism and a bachelor’s in communication arts from the University of Wisconsin – Madison